Thursday, February 5, 2009

You're asking the wrong question!

I was inspired to write this after reading the excellent new blog The Gray Area by the mysterious MSK. By the way, I have been saying for years that the agenda of our Nation has been driven by the fringes on the left and right. People with passion get the most attention and tend to spend the most money getting their candidates elected. As many of you know, I am a fanatical gun nut. So it's hard for me to see the gray area on that issue but it's important to try. Otherwise the intellect shuts down and only shouting remains. The Gray Area is a great concept for a blog and is (so far) really well executed.

But that wasn't what I wanted to write about. MSK posts on the issue of executive compensation and this is a topic that makes me scream (and normal people yawn). Did it bother me when the Chairman of my old company made $6,000,000 in the same year that they eliminated the profit sharing plan? Sure it did. It was politically insensitive and severely hurt morale. Yet, that company was (and remains to this day) profitable as a result of some very smart decisions made at his level. That is worth compensating. It also would have been a blow to the company if he had left for greener pastures elsewhere. I also believe that incentivising employees to succeed at all levels is the best model going. If you generate revenue for the company, you get rewarded. Period. If you don't, you lose your job. um, also Period. Sounds tough, and it is. In fact, it keeps me awake at night. But it also keeps me motivated between 9:30 and 11:30 and then from 2:00 to 4:00 (that was a joke, boss!). It kills me that the media doesn't get the fact that the Wells Fargo employees who were going to be honored for their successful year with a trip to Vegas were part of the solution, not the problem. And what about the employees at the hotel? Don't they have families and bills to pay? So when the CNBC guy asked Matt Lauer on the Today Show this morning(in jest, of course) if he would take a pay cut if Today's ratings "went to zero" I screamed, "You're asking the wrong question!" Because what they should ask Matt, Meredith, Ann and Al is this. What if the Today Show's ratings were through the roof, generating tens of millions in ad revenue and was the only brightspot at NBC who was otherwise hemorraging money, would you agree to take only $500,000 a year? Hell no, you'd go to ABC in a heartbeat. This is why you shouldn't limit the pay of your top producers. A trip to Vegas would be nice too.


  1. I think you've gotten to the heart of the issue. While our free enterprise system surely isn't perfect, it's the best that's been invented yet. The opportunity to create personal wealth inspires millions of people to contribute their best to the economy, which is the heartbeat of a society (witness the awful living conditions that people had to endure in the managed economy in the satellite countries of the former Soviet Union).

    Our free enterprise system inspires smart industrious people from all over the world to immigrate here to better themselves by improving their economic condition - no other country in the world offers these opportunities. They work hard at all sorts of occupations, contributing to society, and we all benefit.

    Should we empower government officials to set price controls on what people can earn? After all, the government run things so well - the motor vehicle bureau, the Post Office, public hospitals, public schools... In NY the government has managed to lose money in the gambling business! (Off Track Betting). Perhaps we should let the government set salaries for actors, athletes, performers etc, similar to the Matt Lauer comment you cite above. I'm sure that will motivate people to do their best.

    If the government sets prices and interferes with market mechanisms the law of unintended consequences takes over. One example - during World War II the government set price controls on wages. There was a shortage of labor and companies had to compete for talent. As they couldn't use wages to attract workers they created a new form of compensation in the form of benefits, primarily health care. Hence, today we have the bizarre legacy of the employer providing health care with the individual losing the ability to decide on what he needs - losing freedom of choice.

    Interesting articles in 2/6 WSJ on the Opinion page on these issues. In times of crisis where there is pressure to act quickly and a desire to punish offenders, we have to be careful about permitting the government to make reactionary decisions which in the long run can be very harmful.

    One final point. While the government shouldn't set price controls on compensation, they do have the right to impact the structure of compensation for companies receiving a government bail out (like shareholders who today have to approve executive compensation programs which is evolving into approval of the actual compensation packages). This should involve a bias toward long term value creation in the form of more equity based compensation and less current cash compensation. This creates alignment of interests between management, shareholders and government to restore the health of the company (and for the government to get paid back in the form of paying off the loan or in appreciated equity).


  2. My guess is tha the risk-reward paradigm driven by excessive executive compensation drives companies to take unecessesary risks. What do you call an executive that makes $30 million one year and drives the company into the ground the next? You call him set for life. I have no issue with pay that rewards success over the long haul, but I've been in companies where the model is big-bucks for this year, and in those environments, caution is never in vougue.

  3. Good point Ed. Maybe a smart b.o.d. makes stock options the bulk of compensation. If the company tanks the next year the options never come into the money. I am grateful (now) to be working for a bank where caution has always been in vogue.

  4. Robey: I like MSK's work, too. I check out the blog and there are TOO FEW POSTS. I love the point about free markets and executive compensation. I find Alan Mulally, CEO and President of the Ford Motor Company to be a real model corporate citizen in many ways. He's a real AUTOMAKER as opposed to a part of a small cartel, monopolistically "competing". In fact, when both the other cartel members and the Bush Administration tried to interfere with his plans to cut back sharply on Explorer production in favor of trying to ramp up quickly to build a line of luxury low-to-now sedans and coupes, he met resistance from the government and the cartel.

    So, being exactl the kind of CEO American industry needs more of, he used creativity and experience to get the job done. He went looking for industrialized nations around the world with equity and debt markets whose companies and government science ministries were ahead of the US on the techological end of the alternative fuel sources and whose fixed costs in building new property plant and equipment would be cheaper and meet less resistance. Mulally already had the best relationship of any of the US cartel with the UAW, so establishing foreign affiliates in highly unionized countries was not a loss of virginity for him.

    He has settled for the time being on Brazil, France, Germany and Venezuela (so much for Chavez the Communist!).

    When the series of Deroit bailouts were being discussed, Mulally for reasons of his own, refused bailout money despite having lost around $4 MMM in 2008. He also refused all personal compensation. Mulally explained it this way basically that he recognized that the automotive industry model as it stood in Detroit was hurting badly and not likely to improve as a group, but that he was happy with how he had positioned Ford going forward and didn't like the idea of more government interference in his company if he was willing to swallow his losses like a man to the point of taking nothing out for himself for the losing year.

    I find the idea that Obama would even "pressure" the GM board into making any sort of decision on executive staffing to be scary. GM has not been the best run auto company by any stretch of the imagination but there are rules of corporate procedure and finance as well as freedom of choice all around to take care of these situations. In descending order: The shareholders have a voice. The Board Of Directors have a voice. Management has voice. Should the company in question be bankrupt or in work-out or receivership, the senior debt holders are top dog in decision-making. That's the basic Theory Of Corporate Finance and it works.

    A government has overall fiscal and monetary tools and certain tax breaks, easements, incentives, etc, may always be negotiated at the local level, but for the Executive Branch of the US government to get involved in ONE private sector businesss that was not a company which in workout would have brought down the whole country, is worse than socialism or communism (neither of which exist in reality) but Totalitarian Statism (fsscism).

    Intelligent capable men of integrity with such disparate views as former President George Herbert Walker Bush and US Representative Dennis Kucinich have both said the identical thing on this subject: THE GOVERNMENT IS NOT IN THE BUSINESS OF PICKING WINNERS IN A FREE MARKET.

    Keep up the good work, MSK.

    @@ ROBEY: We never had the gun discussion, I just realized. I don'tknow if this will surprise you or not but my view of gun ownership is probably identical to yours although the times when I lived in the US, I exercised my right NOT to own a gun.

    I have to give Howard Dean as DNC in 2006 a lot of credit on this issue. He squared the circle in his 50-statestrategy by effectively saying in the Mountain West, "it'a sll about personal freedom and people of conscience can agree to disagree on key issue if freedom is respected." His goal at the time, of course, was to explain to voters who'd be hesitant to vote Democratic (not that I'm a Democrat--I'm without party in Panama and favor neither in the US) that the freedom-to-choose-or-not-choose to bring a pregnancy to term within the Blackmun standard and the 2nd Amendment got at very similar philosophical issues. And candidates had to treat voters like responsible adults on both while making the point that if I can agree with you on gun ownership absolutism, how can you dispute me on choice?

    Besides, based upon the little I know of you, I wouldn't call you a gun nut. My guess is that you enjoy owning guns, and are a good marksman with various kinds of guns and it's something you really enjoy. Maybe you're also a hunter which can be another very enjoyable pasttime. I'm curious about them. And at some point in my life, I'd like to learn to shoot but I'm pretty sure when the mood catches me I'll probably rededicate myself to golf instead.

    To me, a gun "nut" is a White American Suburban Man without a tremendous interest in improving his marksmanship or developing his arsenal or understanding the physics or getting into hunting. He's got some weird fanatasies about being singled out by a Black/Lationo/Russian/Serbian/Whatever gang for a home invasion and has Bruce Willis fantasies.

    I know plenty of street guys in the states and Colombia who carry guns. They don't know that Mr White Suburban Thimble Dick even exists. They don't care. He's not a part of their lives in terms of money or rivalry or settling slights or whatever.

    I also know a Ukrainian-American who was on a crash crew and he told me that Joe Public would never have enough cash, jewelry, drugs, artwork, or bearer bonds in his house to take the risk of a 20 year bid because the prosecutor would come way heavier down on the crew for that than for their hitting a rival gang's house which has the virtue of having cash and cash equivalents plus owners who know to cooperate so asnot to get hurt and also to SHUT UP AND NOT RAT. So, the penalties would be less anyway.

    In my mind, these kind of goofball gun nuts really need better safer fantasies and either another hobby or to take their gun ownership more seriously.